The Optimal Model for Operating Cash Flow in Chinese Industries

Abstract

This chapter investigates the relationship between accruals and cash flow prediction in China’s industries, drawing upon existing models explored in studies of US and UK industries. Evidence from both US and UK studies supports the hypothesis that accruals contain significant explanatory power for future cash flows. However, there is no consensus regarding the forecast superiority of using models of aggregated accruals versus models of disaggregating accruals into components of earnings. This chapter examines three models by panel regressions to find out which model best explains operating cash flows in China’s industries. We find that the cash flow model that disaggregates accruals into normal and abnormal accruals has the best explanatory power for cash flows in different industries.